Wiedeking makes millions betting the ranch

It isn’t only the investment bankers who have pay packages that offer perverse incentives.

Take Wendelin Wiedeking, for instance. The chief executive of Porsche <PSHG_p.DE> enjoys a package that most bankers could only dream of. And boy does it offer a perverse incentive. Indeed, arguably, it’s one of the reasons that Porsche has got itself in such a big financial hole that it may have to be rescued by Volkswagen <VOWG.DE>, a rival carmaker in which it has built a majority stake.

Wiedeking is one of Germany’s best paid bosses. He is entitled to receive a performance-related bonus equivalent to 0.9 percent of Porsche’s pre-tax profits. He apparently secured this right when he took over as chief executive in 1993. At the time the company was losing money and almost bankrupt.

The incentive has certainly worked. Wiedeking has turned Porsche into the most profitable car company in the world. The snag is that a large chunk of these juicy profits have come from financial sources rather than boring old car-making — initially from unspecified hedging activities and more recently from trading in VW shares.

In 2008, about 80 percent of Porsche’s declared pre-tax profit of 8.6 billion euros came from VW. Much of this was unrealised paper profit on options the company held over VW shares.

Porsche’s supervisory board may have thought they were doing a smart deal, aligning Wiedeking’s interests with their own. In fact they have given him a one-way option (he doesn’t share in any losses) and paid out on unrealised profits. In reality, they have simply given him a huge incentive to bet the ranch, which he has done with disastrous consequences. No wonder some of the Porsche clan members now take a rather more dim view of their one-time wunderkind.

Wiedeking may soon lose his job. But he may still have the last laugh. His contract lasts until 2012 and Porsche may have to pay him out whether he stays in the job or not. No wonder Wiedeking chortled when asked recently whether he was going to resign. “Why should one resign if one has a well-drawn contract?” he said. Why indeed?